Andrew Murray (WA, Australian Democrats) Share this | Hansard source

The Tax Laws Amendment (2007 Measures No. 3) Bill 2007 brings together a diverse range of matters to amend various pieces of taxation legislation. The bill is an omnibus bill with 10 schedules. It amends the Income Tax Assessment Act 1936, the Income Tax Assessment Act 1997, the Fringe Benefits Tax Assessment Act 1986, the Income Tax (Transitional Provisions) Act 1997 and the Taxation Administration Act 1953. Some brave souls periodically recommend overhauling the taxation system completely, but we always go back to piecemeal picking at the edges of the taxation system. Better than leaving well alone, I guess, simply because all is not well.

The Tax Laws Amendment (2007 Measures No. 3) Bill 2007 implements the following changes to Australia’s taxation system in 10 schedules: distributions to entities connected with a private company and related issues, a non-concessional contributions cap during the simplified superannuation transitional period, assessment of capital gains of testamentary trusts, superannuation death benefits of certain defence and police personnel, extension of the transitional period relating to the application of accounting standards under the thin capitalisation rules, repeal of dividend tainting rules, interest withholding tax exemption, investments and disposal of interests in forestry managed investment schemes, Australian trust distributions to non-resident trustees and new withholding arrangements for managed fund distributions to foreign residents.

This bill was referred to the Senate Standing Committee on Economics for report and, as usual, the government gave it a very short time frame in which to receive submissions, to hold a hearing and to prepare a report. Given the short time frame, it was not surprising that only 11 submissions were received which dealt with only a couple of the schedules. This could be evidence that all the other schedules are so wonderful that no-one has a problem with them or it could be evidence that people and organisations very pressed for time and resources were unable to make submissions on time. Be that as it may, and we are unfortunately getting used to these hurried committee timetables, I can only comment on the evidence before me.

I would like to say how grateful I was for the expedition of Hansard in providing us with a record of the hearing. It was in my email inbox by Friday afternoon following a Friday morning hearing. Also the secretariat has to be commended for the swift turnaround of the Senate economics committee draft report. It at least gave those of us interested in writing a minority report time to consider the matter. The chair of the committee is to be thanked for his quick work in clearing his draft. His consideration of other committee members is a welcome change. There was robust debate during the hearings but the chair was courteous, fair and helpful.

Although there are 10 schedules to this bill, I am only going to deal with those which were subject to the committee hearings—in particular, schedule 10, which was the most contentious. I do want to briefly remark on schedule 7, which had been contentious, and the shadow minister has covered his summary of the events which led to schedule 7.

• Schedule 7 to this Bill amends sections 128F and 128FA of the Income Tax Assessment Act 1936 (ITAA 1936) to more closely specify those debt interests that are eligible for exemption from interest withholding tax (IWT) ...
• These amendments correct an unintended broadening of the exemption that occurred following the New International Tax Arrangements (Managed Fund and Other Measures) Act 2005 (2005 amendments). Closer specification of the range of debt interests eligible for the exemption realigns the exemption to the Government’s policy intent and enhances the integrity of the tax system.
• The amendments specify that non-debenture debt interests that are non-equity shares (including those subject to the related scheme rules in Division 974 of the Income Tax Assessment Act 1997 (ITAA 1997)) and syndicated loans are eligible for exemption from IWT. They also introduce a regulation-making power to prescribe further types of eligible debt interests.

Those listening in the Treasury benches will recognise that as a quote from the explanatory memorandum and my compliments to the Treasury officials concerned for correcting that schedule and enabling us all to support it.

According to the explanatory memorandum, schedule 10 amendments are intended to improve the efficiency of the managed funds industry in respect of the collection of tax from distributions to foreign residents. As noted in the committee report, of the 11 submissions that were received, six commented on schedule 10 and they all made the same or a similar point: while the new withholding tax regime was a great improvement, the 30 per cent withholding tax rate proposed in the bill was too high and made Australia uncompetitive internationally. The main contention from those making submissions was that many countries in our region and outside our region only attract a 15 per cent tax rate or less. The committee’s evidence from written submissions and the public hearing supports Labor’s policy of having a flat and final withholding tax rather than a deductible headline nominal rate, and the rate for the withholding tax itself being 15 per cent. The ALP believes that imposing a withholding tax of 30 per cent would act as a disincentive to foreign investment in Australian managed funds and Australian property trusts. I think they are right.

There is no doubt, and this was acknowledged by those giving evidence, that there remains a way to structure the investments so that what is perceived as a high rate is not paid at the end of the day. The committee heard evidence that large institutions and entities—not smaller ones because they do not have the resources—can do just that. That in itself is discriminatory. The evidence was that they can structure the investment through different vehicles and claim deductions to ensure that they are paying, in some cases, no more than a final rate of 12½ per cent. The Treasury indicated that not many do that, from which I conclude that most would rather pay up than go to the trouble and cost of structuring, gearing and putting in annual tax returns and getting their money in a year to 18 months later. It is all too complex, costly and hard. Or they can take their money elsewhere, which is a real and growing option in this fast moving dynamic capital market, especially when our headline rate of 30 per cent stands out as uncompetitive. I take issue with the shadow minister’s remark that in this regard he was in fact referring to Australia’s strength in this area historically. The indications are that the prospect of that strength is unlikely to be maintained unless we adjust the rate.

Mr Speed, chairman of the Speed and Stracey legal firm, criticised the bill not only for the 30 per cent rate but also for the fact that it was a headline rate of tax rather than a final and flat withholding tax rate. He said that when he was on the phone to overseas investors and told them the rate of tax was 30 per cent, the phone metaphorically went dead. He intimated that it stopped people in their tracks and that often overseas investors would then look to similar investment in other countries where the rate was lower. The committee heard that, on the whole, overseas investors are not persuaded to structure their companies differently for a tax benefit in Australia when they can pick up the phone and do a deal with Singapore without going through the hoops of setting up different corporate structures and where they do not have to lodge tax returns to claim back tax paid. If there was a choice of going somewhere where the fixed and final rate was lower and you did not need to jump through administrative hoops and have a year or more delay in getting money issues resolved, I do not know many market participants who would not say, ‘Let’s go with the lower tax rate and the easiest structure.’

The witnesses at the table brought up the point that Australia is currently well regarded in this market. They also said that Australia has the potential to become a financial hub for this style of investment, if the rate is right. But the reality is that countries in our region, like Singapore and Japan, are just as stable as Australia in these terms. They have lower rates and will attract overseas investment at the expense of Australia unless we adjust our regime.

I recognise that the Treasury have said that the market has grown very well over the last couple of years, and they are accurate in saying so. They also said that Australia has done well, and they are accurate in saying that too. But that is in the past; the market is moving on and Australia should continue to move with it. The evidence is that in this bill the Treasury have done a good job of simplifying and streamlining the taxation regime in this area, and they were rightly complimented on that fact.

But, most of all, the rate will determine investment. If we wait—as was suggested in the majority report—and just keep an eye on how things are developing, then there is a chance that we will be left behind. Getting tax relief for investors from particular countries as a result of new double taxation treaties is a very slow process. We all know how long it takes to negotiate a double tax treaty, as was recommended by the majority report. Once the terms of the treaty have been finalised and it has been ratified, there has to be legislation drafted to incorporate the treaty into Australian law. That legislation must then pass through parliament. That is too slow and bureaucratic for a fast-moving capital market. It is too slow, and more agile neighbours will react to the marketplace realities.

I support Labor’s recommendations, firstly, that the rate should be a flat and final rate so that investors do not face the complexity and cost of structuring and gearing and also do not have to wait years while tax returns are processed and, secondly, that the rate should be 15 per cent—which is at the upper end of rates—so that Australia remains competitive in this area of investment. If the government were not willing to accept the 15 per cent rate, then I think they at least should consider a flat and final rate based on the effective tax rate, which they know—or at least have a feeling as to what it is. Of course, we do not have a feeling as to what it is because we were not given the figures.

I now have a few remarks to make on the other schedules. These were either discussed by the committee or submissions were received on them. Schedule 8 streamlines the taxation for forestry managed investment schemes in the Income Tax Assessment Act 1997. It entitles investors to immediate up-front tax deductibility for all expenditure. As the Minister for Revenue and Assistant Treasurer has stated, these proposed arrangements will provide greater certainty for investors in forestry, will see the continued expansion of Australia’s plantation estates and will reduce reliance on both native forests and overseas imports. However, as I have said before—and it bears repeating—the policy principle behind the streamlining of these investment incentives should be rational and transparent.

Are these investment incentives—these tax concessions—good for both economic and environmental reasons? Personally I am not so sure. Why do some trees and not others qualify for a tax concession? Why eucalypts but not walnuts? Why pines but not olives? If the Prime Minister wanted to prove his green credentials then maybe investment in all trees, and not simply managed investment forestry schemes, should be supported with taxation concessions. If he wants to prove his economic credentials then maybe investment in all trees, and not simply managed investment forestry schemes, should be supported with taxation concessions.

I have argued in the past that from an economic perspective tax concessions are only appropriate for infant industries that we wish to encourage. They should be time limited unless the industry is of national strategic significance. On environmental grounds, it is possible to argue that forestry is of national significance now. Even the tired, sceptical, climate-warming deniers that constitute some members of our federal government accept that trees are an intrinsic good in this respect. So why not include all trees that are commercially viable? Why just include forestry plantations? If a farmer invests a large amount in planting trees to combat salinity on his property in southern Western Australia, does it not make sense that these tax concessions should be extended to that farmer?

There was only one submission to the committee regarding this schedule. It was a joint submission from the National Association of Forest Industries, Tree Plantations Australia, Treefarm Investment Managers Australia, and the Australian Plantation Products and Paper Industry Council. Needless to say, these entities supported the legislation as it resolved ‘10 years of instability and uncertainty about the future ongoing taxation arrangements for retail forestry’. That, of course, is a virtue of the legislation: it does indeed get rid of the uncertainty which has dogged the industry.

I note that there were no submissions from environmental groups or non-profit sustainability groups or farming groups—not, I guess, because they have nothing to say on the issue but because this committee process was rushed. So the government gets a cheer from those involved in forestry managed investment schemes but it leaves unanswered the questions that I have asked.

As everyone in the Senate knows, I am all for consistency in tax matters. That is why schedule 4 has me puzzled. The schedule applies to police officers and members of the defence forces who die in the line of duty. As was pointed out by the United Firefighters Union of Australia in its submission, firefighters are not included in the categories of persons who can take advantage of this benefit. Yet many would say that they have put their lives on the line in similar ways to defence personnel and police officers, when they are faced with danger. Many emergency workers—paid and voluntary—are at risk at their work. Ambulance drivers are unfortunately often attacked when they attend at nightclub brawls or domestic disputes. All of these people should surely be afforded similar treatment to that given to police officers and defence personnel if the tax concession were to be granted because people may be harmed or die in the line of duty. Perhaps police officers and defence personnel are being given this preferential treatment because they are deployed overseas. But Australian firefighters regularly assist overseas, as do aid workers and many others. There have been some very unfortunate instances of overseas aid workers being killed in the line of duty, and yet they will not get this particular concession. It is totally unclear.

I think that proper and thorough consideration should have been given to this matter and consistency of tax policy applied. There is no evidence that I could see in the explanatory memorandum to satisfactorily explain the reasoning behind this amendment and why it was limited to defence personnel and police officers. All that Treasury said to the hearing was that it was a policy matter on which they could not comment. To put it another way, they were just following orders.

In conclusion, as you know, Madam Deputy President Kirk, this is a cognate debate, with the Tax Laws Amendment (Small Business) Bill 2007 to be considered. I wish to make some remarks and to ask a question on that bill, so I would seek to ensure that there will be a committee stage following the second reading debate. I hope you will ensure that that occurs.